Cheque furnished as security can also come under NI Act if debt/liability exists

In Sunil Todi & Ors v. State Of Gujarat & Anr, one of the questions before the Supreme Court was whether the dishonor of a cheque furnished as a security is covered under the provisions of Section 138 of the NI Act

Background

On 19 December 2015, a Letter of Intent was issued by the Appellant/Company to the second respondent for providing uninterrupted power supply at the plant of the company situated at Aurangabad in Maharashtra. A cheque post-dated 28 August 2017 in the amount of Rs.2,67,84,000/- was issued with the following endorsement on its reverse: to be deposited after confirmation only for security purpose. The power supply commenced from 1 July 2016. On 4 July 2016, the company addressed a communication to its banker, Karur Vysya Bank, requesting to stop payment of the above two cheques. As per agreement, three LCs favouring the second respondent were issued by Punjab National Bank at the behest of the company but were found to be not in correct format. The Appellant/Company did not correct the error. On 20 October 2016, the company terminated its agreement with the second respondent. The cheque which was issued by the company was deposited on 28 August 2017. On 18 September 2017, a legal notice was issued by the second respondent to the appellants alleging the commission of offences under Section 138 of the NI Act. The Appellant/Company objected that the cheque that was issued was only for the purpose of Security and not for encashment.

The Appellant/Company primarily based their argument on the judgement of the Supreme Court in Indus Airways Private Limited v. Magnum Aviation Private Limited (2014) 12 SCC 539, wherein it was held  that the Explanation appended to Section 138 leaves no manner of doubt that to attract an offence under Section 138, there should be a legally enforceable debt or other liability subsisting on the date of drawal of the cheque. In other words, drawal of the cheque in discharge of an existing or past adjudicated liability is sine qua non for bringing an offence under Section 138. If a cheque is issued as an advance payment for purchase of the goods and for any reason purchase order is not carried to its logical conclusion either because of its cancellation or otherwise, and material or goods for which purchase order was placed is not supplied, in our considered view, the cheque cannot be held to have been drawn for an existing debt or liability. The payment by cheque in the nature of advance payment indicates that at the time of drawal of cheque, there was no existing liability.

Judgment on appeal

The SC observed that in Indus (supra), the cheque had not been issued for discharge of a liability but as advance for a purchase order which was cancelled, whereas in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited (2016) 10 SCC 458 judgment which considered the Indus (supra), the cheque was for the repayment of a loan installment which had fallen due. The Court noted that though the deposit of cheques towards the repayment of installments was described as a security in the loan agreement, the true test was whether the cheque was in discharge of an existing enforceable debt or liability or whether it was towards an advance payment without there being a subsisting debt or liability.

A two judge Bench in Sripati Singh v. State of Jharkhand 2021 SCC OnLine SC 1002 had observed that  a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance. Security in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound. When a cheque is issued and is treated as security towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as security cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security.

Referring to the judgement of the Calcutta High Court in Banchharam Majumdar v. Adyanath Bhattacharjee (1909) ILR 36 Cal 936, the SC explained that  the term debt also includes a sum of money promised to be paid on a future day by reason of a present obligation. A post-dated cheque issued after the debt has been incurred would be covered by the definition of debt. However, if the sum payable depends on a contingent event, then it takes the color of a debt only after the contingency has occurred. 

The purpose of the NI Act would become otiose if the provision is interpreted to exclude cases where debt is incurred after the drawing of the cheque but before its encashment. Moreover, Parliament has used the expression debt or other liability. The expression or other liability must have a meaning of its own, the legislature having used two distinct phrases. The expression or other liability has a content which is broader than a debt and cannot be equated with the latter. In the present case, the cheque was issued in close proximity with the commencement of power supply. The issuance of the cheque in the context of a commercial transaction must be understood in the context of the business dealings. The issuance of the cheque was followed close on its heels by the supply of power. To hold that the cheque was not issued in the context of a liability which was being assumed by the company to pay for the dues towards power supplied would be to produce an outcome at odds with the business dealings. If the company were to fail to provide a satisfactory LC and yet consume power, the cheques were capable of being presented for the purpose of meeting the outstanding dues. 

According to the complainant, the LCs were not in a format agreed to by their bankers. Once payments for electricity supply became due in terms of the PSA, and the company failed to discharge its dues, the second respondent was entitled in law to present the cheque for payment. Merely labelling the cheque as a security would not obviate its character as an instrument designed to meet a legally enforceable debt or liability, once the supply of power had been provided for which there were monies due and payable. There is no inflexible rule which precludes the drawee of a cheque issued as security from presenting it for payment in terms of the contract. It all depends on whether a legally enforceable debt or liability has arisen. 

The legal requirement which Section 138 embodies is that a cheque must be drawn by a person for the payment of money to another for the discharge, in whole or in part, of any debt or other liability. A cheque may be issued to facilitate a commercial transaction between the parties. Where, acting upon the underlying purpose, a commercial arrangement between the parties has fructified, as in the present case by the supply of electricity under a PSA, the presentation of the cheque upon the failure of the buyer to pay is a consequence which would be within the contemplation of the drawer. The cheque, in other words, would in such an instance mature for presentation and, in substance and in effect, is towards a legally enforceable debt or liability. This precisely is the situation in the present case which would negate the submissions of the appellants.